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Elon Musk Drops Margin Loan From Twitter Bid, Making It A Little Less Risky

Elon Musk has dropped one of the riskier components behind his $44 billion bid for Twitter, a move you can read as a smart one given the single direction markets have moved over the past few weeks: Down, down, down.

Musk has scrapped a plan to take out a margin loan as part of his financing for the $54.20-a-share takeover, according to a new SEC filing. Originally, he intended to use a $12.5 billion such loan, but several weeks ago, he halved the figure after bringing in additional investors to the deal. Now, he says he’ll make up that $6.25 billion in additional equity. This doesn’t affect another $13 billion in standard corporate debt involved in the deal.

If Musk had taken the margin loan, he would’ve needed to secure it with his Tesla stock. Under the loan’s terms, Musk needed to put up $31.25 billion worth of Tesla shares. With the stock price falling, he was in the position of needing more Tesla shares to cover the loan. Margin loans are a gamble in the best of times. Even more so during a financially distressing one, such as the period we currently find ourselves in.

If things worsened, there was the outside possibility Musk could face a so-called margin call, when the equity securing a margin loan has deteriorated and a lender forces a loan’s repayment. Had this happened, Musk would’ve needed to sell Tesla stock all pell-mell style, depressing the share price further. (The most dramatic margin calls lead to dramatic ends, spirals that have fully consumed and ended companies in the past. This happened recently to Archegos Capital Management. It probably wouldn’t have happened to Tesla, but it would’ve definitely made a bad situation even worse.) Musk’s lender, Morgan Stanley, had set a threshold of a 40% decline in Tesla stock to trigger such an event. And with Tesla stock already down almost 25% in the past month, you get a sense of Musk’s circumstances: Significantly changed from when he first talked about taking over Twitter in April, that is is to say.

As with everything about Musk and Twitter, there are some complications to this turn of events. Foremost, where will he get the $6.5 billion in equity to replace the margin loan?

He’ll need to do one of two things. Possibly, he’ll sell more Tesla shares, not a great scenario in a down market. Doing so will further depress Tesla stock. Or he will need to find more friends to join his merry band, also not a great scenario. If it was hard to convince investors a month ago before equities started to slip—and by the dearth of traditional high-profile names on the deal table, it sure seems like it was difficult—it’ll be even tougher to talk people into it now. In down markets, investors run away from companies like Twitter, scantily profitable ones and forever something of a commercial disappointment. They do not tend to run toward them. Twitter shares ended Thursday at $37.16, much below Musk’s $54.20 offer.

It’s not just that! Imagine going out on a fundraising tour right now to buy a company you’ve just spent the past few weeks maligning, accusing it of mismanaging basics like estimating spam. It’s as if Musk is looking for someone to go in on a fixer-upper home with him after he has stood in the street and yelled about how the place has rats and bid wiring. (But don’t worry, I know a good exterminator, he will presumably need to tell any new co-investors. This house will be great after I’m done with it. Justifiably, they may then look at him sorta funny.)

And here’s the other matter: Hasn’t Musk said the whole thing’s on hold over those spam numbers? In a sense, you can view his decision about the margin loan as a sign it’s not on hold, and Musk expects to follow through. Why drop the margin loan and make the SEC filing if he didn’t? Ah-ha. Looks like he might take the place after all even if it does have pests.